Punchinello’s Chronicles

November 22, 2008

How Come Prices Keep Going up with Continual Inflation?

Ever wonder how come we just automatically have never-ending price increases? How come we always have inflation? Where is it written that no economy can exist without prices rising forever and inflation at some level going on forever?

I remember buying Cornish hens for 50-cents each. Now they’re sold on a price-per-pound basis, coming in at around $3 per hen. When I ask someone how come, I’m told that’s just the way things are. Prices always go up. There’s nothing we can do about it, costs keep going up and they’ll go up forever.

Follow that logic, and at some point I’ll pay $1,000 for a single Cornish hen! Why?

Well, suppose I own a chicken farm and my specialty is these baby chickens, otherwise known as Cornish hens. Where do they come from? Eggs. And who makes the eggs? God. How do I get new eggs? They come from pre-existing hens. Fine. I get that.

Let’s suppose we also live on an island with only 100 people. That’s our entire society, our entire economy. And further suppose that money works the same way, banks work the same way, and everything is just like a big country. It’s just that we want to limit our population to 100 people.

At first I sell my hens for 10-cents each. I have ten of them, so I get $1 and that’s it. That’s the end of my inventory. I have no more hens, only eggs, and they won’t be ready for a couple of months.

At that point, 10 people have a Cornish hen for dinner. They’ve spent ten cents, and I’m waiting for the new brood to hatch. But 90 other people want a hen too. They just can’t get one.

Now let’s add into the mix a salary. Everyone on the island makes $5 a year. So when they spend ten cents on one of my hens, they have $4.90 remaining. They’ve spent 2% of their annual income on a single Cornish hen, for one dinner.

I’m a smart guy, so I keep as many eggs as I can, and end up with 40 hens. At that point, something weird takes place and I discover that I can ONLY have those forty hens. No matter what I do, they simply won’t breed, or the eggs won’t hatch, or they kill each other. Who knows; it’s a mystery! But one way or another, the ultimate limit on my stock is 40 Cornish hens. Period.

That means I can only satisfy 40 people. The other 60 people are out of luck. The question is WHICH forty people will get a hen?

Well, the first thing that happens is people decide they’re willing to pay more than 10-cents per hen. Suddenly, I get a lot of people come to me and say they’ll buy one of my hens for $1 (20% of their annual income). That works for awhile, but I’m still limited to only forty hens.

I sell them for $40, a ten times what I used to get for them! Damn…! I’m makin’ some serious cash here. Probably get stuck for a windfall profit tax!

It seems that Cornish hens have become the rage! They’re the In Thing! EVERYbody wants a Cornish hen. I look everywhere, but there’s simply no way for me to increase my production. Forth hens, that’s it. That’s all I can get.

Suddenly, forty people come to me and will pay $5 for a hen! That’s their entire annual income! But, being a greedy sort of fella, I figure it’s not my problem. If they’re dumb enough to hand over their entire annual salary for a chicken dinner, fine by me! Who am I to argue?

So now I sell all my hens and make $200! Holy Crap! Two-frickin’-hundred dollars! I’m in like Flynn, ready to build a mansion.

But STILL people want these hens. They’re insane for the things, willing to do anything to have a Cornish hen! (Must be some seriously good eats, right?) An interesting thing begins to happen. Some people go to their neighbors and borrow money for a hen.

With each hen costing an entire annual salary, only a few people can borrow money from those who don’t particularly want to play the game anymore. Out of 60 potential lenders, half of them decide that the stakes are too hight, and a Cornish hen dinner simply isn’t worth it. Instead, they’ll put their money in a bank and eat carrots.

People go to the bank and take out a loan. They need an additional $2 to bid for the hen to be “competitive.” Now they come to me and offer me $7 per hen. At that point, they’re beyond their annual salary. They only make $5 per year, but they’re promising to pay back $2…somehow. How? Nobody knows. It’s a mystery.

Me, being a greedy sort of fella, I decide to make even MORE money! I sell all my hens and make $350! Goodnes Gracious, I say to myself, not being one to swear. Now I’m well on my way to becoming the wealthiest individual on the entire island!

Notice how the price of hens has gone up and up and up an up? How come?

Is capitalism the root cause of all the price increases? The hens are only worth some amount in a real world. If there was a larger population, or if I could make more hens, would the price stay at $7? Is that seven dollars a legitimate price…or an “inflated” price?

What about the borrowing that went on? Should the banks have allowed people to borrow $2 for a one-time dinner of chicken, when they only make $5 in an entire year? Sure! The banks get interest, thereby getting back $2.75 when the loan is paid off.

In fact, those banks turned RIGHT around and offered “shares” in the loans to the same people who were putting their money in the same banks. So not only did the 60 people who quit with the Cornish hens have their money in the bank, they were part of lending their money to the nutjobs who were crazy for chicken!

Two things: Greed, and Debt Financing. That’s what causes inflation.

Suppose there was a law that nobody could buy anything unless they paid for it outright, cash on the barrlehead. No loans for anything other than long-term, non-perishable, non-consumable items. You want to start a business? Fine. But if you want a Cornish hen, you pay for it yourself. In cash.

Uh oh…the Entire Economy would come to a halt, right? We’d need government bailouts! “That’s not the Capitalist Way,” we’d hear. Special interest groups and their Pinocchio Politicians would pass laws. “A Chicken in Every Pot,” would be the rallying cry! “Everyone has a RIGHT to a Cornish hen!”

Entitlement programs would come into being. The Government would print money, giving it to people so they would have “parity.” Some people could apply for federal funds, to get the $2 beyond their annual salary so they too could afford a Cornish hen!

But I still only have 40 of the damn-fool things in the first place!

Now, with federal funds, bank loans, printed money, and GREED on the part of lunatic hen-lovers, my price would go through the roof. Each hen would be selling at $11 per unit! People would remember back, long ago, to the “good old days” when they could get a Cornish hen for 10-cents. They’d sigh, shake their heads, look at their skyrocketing investment portolio and bank stocks, and wonder at life.

What happens if one year, ten of my poor little birds croak? I go into the shed and they’re FOD (Fell Over Dead). Now I have shortages! Prices go up even further! Hens are selling for $20 each! I’m rakin’ in the cash, but can’t buy anything. It seems that everyone else has spent all their money on MY hens, and they’ve gone out of business. I can’t build a bigger house, can’t buy feed for the chickens, so my money is useless.

That’s when The People decide they need a new leader! They elect a fella who promises to Do Something About the Economic and Cornish Hen Crisis! The Congress and politicians get together to demand regulation! They demand better and more efficient production! They demand more life-efficient Cornish hens! They pass laws demanding that Cornish hens have “price controls!”

Most importantly, they demand that the banks increase the amount of loans. They pass laws to force banks to give the now $40-per-hen price to people who long ago went broke.

It’s greed, yes. But beyond that is allowing people to go into debt at the drop of a hat using a credit card.

When all you can buy is what you can pay cash for, the ONLY reason prices go up is when more people want something that isn’t available. But when you can go into debt and buy what you can’t afford, then prices go up because one greedy person is out-bidding another greedy person. And all with money neither of them has.

Everything that’s happened in the past 60 years can be traced back to the introduction of Credit Cards by the banks. As with everything, it “seemed like a good idea” at the time. People were “supposed to be” responsible and only borrow small sums, to be paid back at the end of each month. Only banks were supposed to offer a “tab,” via credit cards.

But for half a century, Americans have been allowed to “run a tab” everywhere. At the gas station, the supermarket, the clothing store, the electronics store, speciality stores, doctor offices, even with the IRS. (And boy Howdy isn’t THAT an irony…paying your federal taxes with a credit card!)

If people hadn’t been able to spend increasing credit card limits, they would have stopped spending long, long ago. Many companies would have lost some money, but not gone broke. Instead, all these businesses just kept on “putting it on the tab.” Year after year, decade after decade, generation after generation; it’s all “gone on the tab.”

And now the tab’s come due. We’ve run out of Cornish hens.

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5 Comments »

  1. It doesn’t have to be this way you know. It’s all about the government monopoly on money. Printing press – fresh dollars – thank you very much. Prices go up, because money value goes down.

    Luckily, in the real world, there is not cap on the amount of hens. A smart Cornish hen farmer would save some of his earnings, and invest in more space for more hens. Unfortunately, as the governments cries for “more hens for the people” start, they will take some fresh money of the printing press and pay some other fellow a lot of tax money to breed more hens. This guy can breed them much cheaper thanks to tax money, which leads to a temporary lowering of average hen prices. Unfortunately, no one wants your hens anymore, because they are now too expensive. Bum luck says the government – at least everyone has hens. But after a while, people start getting annoyed with having to spend tax money on hens, because after careful calculation they realize that the tax-propped hens are actually twice as expensive as yours used to be, if you consider the tax-part. And since the new guy seems to have the hen shortage under control, the government cuts hen money. This is when hen production goes down, because without government money this guy is a real crapper at breeding hens. End result – spent tax dollars, and less hens on the market. Replace hens for GM, Ford and Chrysler and voila, you have what is coming up ahead (okay, okay, not entirely, but sort of. I know automobiles do not lay eggs)

    Running tabs is okay – if you have the money to back it. Borrowing money for a home is okay – if you are deemed to be credit-worthy enough for a loan, which means that the person you borrow from, directly or indirectly (through a trustworthy bank), must approve of you borrowing the money. After all, he may have the money but no need for it right now, and after some initial arguing you decide on an interest rate that

    a ) He thinks is high enough to be worth the risk that you don’t pay up
    b ) You think is low enough so that it is worth paying the extra insterest to be able to buy the house now, instead of later.

    But what now? The government suddenly decides that some random guy gets to lend money ten times over to whichever moron he wishes, and guess what – random guy and his friends are the only ones allowed to run banks. Rich person A who originally funded your house for a decent interest rate can do nothing except put his money into random guys bank. The icing on the cake is that this system creates inflation – so unless rich person A wants to see his money slowly evaporate – he MUST put his money in this bank. Trustworthy bank goes bankrupt, but no one notices because they are drowning in cheap paper money.

    Welcome to the wonderful world of fractional reserve banking, brought to you by every government in the entire world.

    Comment by hpx83 — November 25, 2008 @ 10:55 am | Reply

  2. Great comments, above. In today’s world we can categorize people as knowing or not knowing something about economics. Those who do know something, already know we’re screwed. Those who don’t know anything, believe everything is fine. It’s unfortunate that so many people require a real-world disaster in order to learn something like basic economic principles.

    Comment by Punchinello — November 25, 2008 @ 7:38 pm | Reply

  3. I guess its a problem of abstract thinking. People need the cold harsh force of a few thousand kilos of reality smack in the face to believe something they cannot see (yet). I am starting to think that it might be a good idea to teach 7-year olds macro-economics. They seem to have more logic in them then grown-up economists.

    “If you spend money, you do not still have it” 7-year-old nods. Bernanke goes into a rant with the conclusion that he doesn’t believe it.

    “Saving is good if you want to have something in the future” 7-year-old nods. Krugman tries to explain the concept of liquidity trap and that in order to have something we must first spend it.

    “Responsible management of money builds wealth”. 7-year old nods. Paulsen issues another bailout package.

    Comment by hpx83 — November 26, 2008 @ 10:42 am | Reply

  4. The key here is that if “we” borrow money from “ourselves,” then we don’t “really” owe anyone anything. It’s our own money.

    The flaw in the logic is that if “I” borrow money from “MY”self, that’s true. But if I borrow money from YOU, then even though we’re both in the same country, one of us owes the other some money!

    Modern economics, dating back to around Roosevelt’s administration, proposes that “we” is the same as “I.” If you examine the underlying philosophy, that’s essentially communism. We just don’t call that. Instead, we call it modern economics.

    I called CitiBank, not so long ago, and told them that because we all live in the same country, and I’ve borrowed money from them, and they’re mostly the same as me, then therefore I don’t owe them any money. They aren’t “them” actually, they’re really “me.”

    They still send me statements.

    Comment by Punchinello — November 26, 2008 @ 1:48 pm | Reply

  5. Haha, that was an excellent move. One should always aim to get the socialist forces confused about their foundations. As for me I think the entire world is still suffering the consequences of the policies of JM Keynes. Too bad no one cares to listen to what real economists say. Paul Krugman – pah. Alan Greenspan – pah. Milton Friedman – pah. These people think macroeconomics cannot be understood except with empirical knowledge. Maybe they cannot – but there are those who can. And the current policies remind me of the idiots who decided – hey, let’s see if we can run the nuclear powerplant in Tjernobyl with the security systems turned off! That lasted for about oh say 13 seconds.

    In the end there will have to be a revolution in economical thinking. It’s just too bad that we didn’t have it in the 1930’s as we should, and instead wasted almost a century on incorrect economical policies. I aim to prove that overconsumption, ecological disasters, political disasters and pretty much any other disaster globally can be traced back to the fatal decision to keep listening to the wrong type of economists.

    Comment by hpx83 — November 27, 2008 @ 5:41 am | Reply


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